How does Zillow come up with their estimates?

Zillow only uses county record data; upgrades don't count for the estimates.  Neither does views, ocean front, traffic, noise, problem neighbors, maintenance condition, roof type, insulation, roof slope, ceiling heights....

Simply it is "multiple linear regression" (look up the LINEST function in your Excel program and look at example #3), also known as "least squares curve fit".

The recently sold data is collected for the area (by distance, not neighborhood; larger distance for rural, closer distance for dense city areas...), then curve fit to the county data:
1) house sqft
2) lot sqft
3) # bedrooms
4) # bathrooms
5) # stories
6) year built
7) tax assessed value (adjusted for local rules)
8) last sold price/date
9) covered parking (if in the county records).

Then the sold units are tested against the curve fit results, and if way out of line, those units are excluded, and new coefficients calculated.

Then, with those coefficients, the county data for the properties are used to calculate an "estimate"; not a "quote", not a "CMA", not an "Appraisal", not a "market value", not a "sale price", not a "list price", not an "offer price", not a "loan qualification"...

So, if two identical properties (which really can't be identical as they can't be in exactly the same position...) sold for exactly the same amount, but 6 months apart, and the market had been "declining"; the one that sold earlier would be assumed by the "curve fit" to be "worth less" since the market declined since.  It doesn't mean it is worth less, it just means that was what the market trend implied.

Notice, that the only place that things like fine cabinetry and extra insulation are factored into the estimate are:
1) the last sold price/date
and
2) the county tax assessed value.

As for owner corrections to the county data; yes they are factored in; but they don't just substitute the data outright to minimize "gaming" the estimates.  As for exactly how they factor them in; they don't really want us to know the limits accepted, nor how much correction is applied when, as giving such info just encourages "gaming".

The "range" given is from the R^2 value obtained from the curve fit.

In other words, don't worry about it.